Cotton futures in China have surged more than 70 percent
this year and were at a record earlier as the global economy
emerged from recession, allowing people to spend more on
clothes. Production of the fiber in China, the world’s biggest
user and importer, is forecast to lag behind demand for a 12th
year, cutting its stockpile to the smallest since 1995,
according to the U.S. Department of Agriculture.

“American consumers better get used to rising prices on
the shelves of Wal-Mart and other retailers,” said Jessica Lo,
Shanghai-based managing director at China Market Research Group.
“China’s manufacturers are getting squeezed not only by rising
cotton costs but also soaring real estate and labor costs.”

John Ermatinger, Gap’s Asia president, declined to say
whether it would raise prices. “We are going to be mindful of
our competition,” he said in a Nov. 10 interview in Shanghai.
“We are going to be mindful of our consumer. That’s how we’ll
ultimately establish our prices.”

Shandong Zaozhuang Tianlong Knitting Co., which makes Polo
Ralph Lauren Corp. T-shirts and track suits for Le Coq Sportif
Holding SA, has raised prices as much as 70 percent from a year
earlier, said sales manager Fred Hu. “If cotton keeps rising
like this, we will need to lift prices by 30 percent by the
Spring Festival next year or we lose money.”

T-Shirt Price Increase

Closely held Tianlong ships 80 million yuan of clothes to
Europe, North America and Japan annually, and raised the price
of T-shirts it sells to Ralph Lauren to $4 each, from $3.20 in
July, he said.

Unitedtex, which sells $24 million worth of shirts and
jackets annually to Gap, plans to raise prices by 5 percent to
30 percent for products that will be available in April, Wu said
in an interview. The supplier plans to increase capacity to meet
the retailer’s demand, she said.

“It’s very hard to budget for input cost, if prices are as
volatile as they are,” said Peter Rizzo, Sydney-based managing
director at FCStone Australia Pty. "It heightens the awareness
of Chinese textile manufacturers to look at risk-management
tools.’’

Cotton-silk blend fabric has surged about 70 percent to
approximately $2.3 a yard since July and prices are now quoted
on a daily basis, manufacturing executives Wu and Hu said.

One-Week Pricing

“We can give clients a price now, but it will only be
valid for a week,” said Tianlong’s Hu.

Some manufacturers aren’t taking orders for next year
because of fluctuating cotton prices, J.C. Penney Chief
Executive Officer Myron Ullman said Nov. 12.

“If cotton goes up 50% or 70%, or wherever it lands, there
will be an impact on pricing that everybody in our industry is
going to feel, but our objective is to have a competitive
advantage, particularly on key price points the customer would
expect us to maintain,” he said.

China’s demand for cotton outstripped domestic production
by 3.6 million metric tons in 2009 to 2010, widening a supply
deficit, the China Cotton Association said Sept. 27.

Cotton production in China, forecast to consume about 41
percent of the global harvest, may lag behind demand by 17
million bales in the year that began Aug. 1, according to the
USDA. That’s more than enough to make a pair of jeans for every
person in China and India, according to Bloomberg calculations
and data on the National Cotton Council of America’s website.

Crimped Margins

Clothes makers are beginning to lose money on some orders,
Unitedtex’s Wu said. “Even if we know we’ll lose money with
this order, we’ll still do it, hoping to make up the loss in the
next deal,” she said.

Gross margins for clothing retailers’ suppliers are between
10 and 20 percent, and net margin is usually between 3 percent
and 5 percent, according to Wu and Hu.

Zhejiang-based Datu plans to further raise prices by 20
percent to 30 percent, she said earlier this month at her Canton
Fair booth, which was filled with polo shirts and pullovers that
she said were made for Wal-Mart.

“We’ve been holding up fairly well even with the yuan
rising,” Tianlong’s Hu said. “Cotton prices are just more
unpredictable. We’re facing a real test.”